Pound Snaps Seven-Day Drop Versus Euro on Merkel Greece Pressure

The pound advanced against the euro, ending the longest run of declines in almost three years, as German Chancellor Angela Merkel maintained pressure on Greece to meet austerity pledges.

Sterling dropped to the lowest level in four weeks versus the dollar after the International Monetary Fund cut its economic outlook for the U.K. and as data showed manufacturing shrank more than economists forecast in August. Ten-year gilts slipped as the Debt Management Office sold 1.75 billion pounds ($2.8 billion) of bonds due in June 2032. The U.K. economy grew at its fastest pace in five years in the third quarter, the National Institute of Economic and Social Research said today.

“Greece and its creditors have yet to reach a compromise,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “This has caused investors to lose confidence and sell the euro against the dollar, meaning it has also fallen against the pound.”

The U.K. currency strengthened 0.5 percent to 80.55 pence per euro at 5:05 p.m. London time. It had weakened for seven days, the longest streak since the period ending Nov. 26, 2009. Sterling fell 0.2 percent to $1.5988 after touching $1.5977, the lowest level since Sept. 10.

“I want Greece to remain in the euro,” Merkel told reporters during a break in talks with Greek Prime Minister Antonis Samaras during her first visit to Athens since the debt crisis began in 2009. “A lot has been done, much remains to be done.”

IMF Outlook

At stake is Greece’s membership in the 17-nation euro and the payment of 31 billion euros ($40 billion) from bailout commitments first made in 2010. In Luxembourg, where finance ministers from all 27 European Union nations were gathering, the bloc’s economy chief Olli Rehn said policy makers intended to clear the funds’ release in the coming weeks.

The pound also rose against the euro as European Central Bank President Mario Draghi said the region faces risks from financial instability

Draghi told the European Parliament in Brussels today that there is no alternative to austerity as euro-area officials are pushing debt-strapped nations across southern Europe for more cuts, despite the risk they will deepen economic recessions gripping the region.

British Prime Minister David Cameron announced today he is prepared to look at holding a referendum on Britain’s relationship with the European Union.

The U.K. economy will contract 0.4 percent this year before expanding 1.1 percent in 2013, the IMF said in its World Economic Outlook today. It previously projected growth of 0.2 percent and 1.4 percent in those years.

IMF Forecast

The 17-country euro area economy will shrink 0.4 percent this year and grow 0.2 percent in 2013, less than the 0.7 percent predicted three months ago, the Washington-based lender said.

U.K. gross domestic product rose 0.8 percent, compared with 0.1 percent in the quarter through August, Niesr, whose clients include the Bank of England, said in an e-mailed statement in London today. That’s the fastest expansion for a calendar quarter since the third quarter of 2007.

U.K. factory output dropped 1.1 percent from July, when it rose 3.1 percent, the Office for National Statistics said today in London. The median forecast of 25 economists in a Bloomberg News survey was for a decline of 0.7 percent. Total industrial output fell 0.5 percent, matching economists’ forecasts.

Gilts Sale

The pound has strengthened 0.7 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 2 percent and the dollar weakened 0.1 percent.

The 10-year gilt yield was little changed at 1.73 percent. The 1.75 percent bond due September 2022 was at 100.21.

The U.K. sold the 2032 gilts at an average yield of 2.661 percent, compared with 3.015 percent at a similar sale on April 12. Investors bid for 2.12 times the amount of securities allotted, up from 1.39 times at the previous auction.

Gilts returned 3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.1 percent and U.S. Treasuries rose 1.8 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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